The impact of corruption

15 jul 2012

Transparency International’s Corruption Perceptions Index scores countries on the perceived level of public-sector corruption, with zero being highly corrupt and 100 being very clean. In 2014 the scores were as follows: India - 38; Brazil - 43. Is this an accurate reflection of the reality on the ground?

Vidya Rajarao: The index reflects the perception of corruption and I think it’s an accurate perception if you link it to the ease of doing business in India. Whether you’re a small-business owner, a mid-sized company or a multinational, the complexity involved in starting a business in India is a real challenge and at every step of the way there are bureaucratic hurdles, and either demands made for payment or monies offered just to jump the queue.

Daniel Maranhão: For the past few years Brazil has seen some very large corruption scandals involving both public officials and the private sector but our corruption perception score has barely moved. I think this discrepancy between the reality and perception is primarily because Brazilians are used to it and believe that it has always been that way.

What impact do these instances of corruption have on economic growth?

VR: They create an added cost to doing business in India. There’s never a guarantee that a corrupt payment will result in the desired outcome so you could end up increasing costs tremendously without any benefit. That’s very acute in large government contracts. And these costs are not legitimate under local regulations so it leads to an entire parallel economy of shadow payments. A recent study by the OECD[1] showed that India’s GDP would be significantly increased if all these corrupt payments were brought into the real economy.

DM: In Brazil, this is a very timely moment for us to be talking about corruption. The nation is in the middle of investigating its largest-ever corruption scandal involving the state-run oil firm (Petrobras) and several other companies. The investigation may bankrupt many companies and halt major infrastructure projects, leading to hundreds of lay-offs. The scandal has also led to reputational damage for the Brazilian economy and heightened the risk of doing business in the country.

How does this affect businesses that are trying to enter the market for the first time or that are already on the ground and trying to expand?

VR: Domestic companies that do not have any overseas operations would likely consider it as a normal cost of doing business. Indian companies that have overseas operations, typically in North America and Europe, are subject to the stringent regulations of these countries, as are foreign multinationals investing in India. Those companies cannot afford to be complacent because they would expose themselves to severe penalties running into billions of dollars, prison time and perhaps even losing customers. Companies might lose out on government contracts but they are just not interested because the risks outweigh the rewards.